BOND ISSUANCE
A School District Perspective
Linda D. Quinley, CFO/COO
Columbia Public Schools
Kevin F. Supple, CFO
Francis Howell R-III School District
Why This Session?
• Legislation has been proposed to require school districts
to use only competitive bond sales
• This session will explore the relative advantages of
competitive and negotiated bond sales, from the
perspective of two practicing CFOs
DEFINITIONS
Competitive Sale
• Bonds are advertised for sale
• Advertisement includes both the terms of the sale and the
terms of the bond issue
• Any broker dealer or dealer bank may bid on the bonds at
the designated date and time
• The bonds are awarded to the bidder offering the lowest
interest cost
Competitive Sale
• Issuer, typically with a financial advisor or investment
banker, conducts all the origination tasks necessary for
the bond offering
• Structuring the maturity schedule
• Preparing the official statement
• Verifying legal documents
• Obtaining a rating
• Securing credit enhancement
• Timing the sale
Why A Competitive Sale?
• Attractive debt amount
• Traditional financing structure
• Issuer has a good reputation and name recognition in the
municipal market
• Issue has an investment grade credit rating
• Relatively stable conditions exist in the municipal
securities market
Competitive Sale Advantages
• Competitive environment
• Lower spreads
• Open process
• Satisfies legal requirements in all states
• Establishes direct costs in advance
Competitive Sale Disadvantages
• Risk premium
• Limited timing and structural flexibility
• Minimum issuer control over underwriter selection and
bond distribution
Negotiated Sale
• Underwriter is selected to purchase the bonds
• Terms of the bonds are tailored to meet the demands of
the underwriter's investor clients, as well as the needs of
the issuer
• Sale may include a process known as a presale in which
underwriters seek customer indications of interest in the
issue before establishing final bond pricing
• Underwriter sells the bonds to its investor customers
Negotiated Sale
• Two party process
• Issuer should have sufficient knowledge of debt financing
to take an active role in establishing the terms of the issue
and sale
• Independent financial advisor can serve as a third party negotiator
Why A Negotiated Sale?
• Unusually large or a very small debt amount
• Complex or non-traditional financing structure
• Issuer is a new or infrequent participant in the
marketplace
• Issue has a low or questionable credit rating
• Volatile conditions exist in the municipal securities market
Negotiated Sale Advantages
• Effective for complex or non-traditional financings
• More flexible timetable
• Longer pre-sale market assessment
• Underwriters may be removed or replaced
• Assistance to the issuer in setting rates, terms, and
conditions of the bond issue
• Influence over underwriter selection and bond distribution
Negotiated Sale Disadvantages
• Lack of competition in pricing
• Elements of spread open to fluctuation
• Appearance of favoritism
CONSIDERATIONS
Issuer Characteristics
• Market familiarity
• Credit strength
• Policy goals
Financing Characteristics
• Type of debt instrument
• Issue size
• Complexity of issue
• Market conditions
• Your story
Competitive Discipline
Negotiated Sale
• Selection of underwriter
• Competitive underwriter
market
• Aftermarket tracking of
performance
Competitive Sale
• Bidding process
• Costs of appraising the
prospects of the issue
• Accessibility of the bidder to
downstream retail or
institutional investors
• Perceived ability of the
bidders to prevail against
their rivals
Research Says…
• Conflicting studies of relative merits of competitive vs.
negotiated sales
• Study results limited due to number of issues included in
analysis
• Self-selection bias
• Sample selection bias
• Empirical evidence will yield biased estimates of expected
interest cost unless there are controls for factors that bear
on the negotiated/competitive choice
REAL STORIES
FROM TWO DISTRICTS
Columbia Public Schools
Francis Howell R-III School District
Take Aways
• Issuers have been well served by both competitive and
negotiated sale strategies
• The municipal bond marketplace is taking advantage of
information technology innovation
• Administrative enhancements offer great opportunities for
efficient and effective bond sale programs
Alternate Approaches
• Conduct competitive bidding within the legal framework of
a negotiated sale
• Infuse competition in the negotiated sale process
• Unbundle financial services
Conclusions
• Neither the competitive sale nor the negotiated method of
sale is ideal for all bond issues.
• The appropriate method of sale should be determined on
a case-by-case basis after evaluating a number of factors
related to the proposed financing, the issuer, and the
bond market.
• The challenge for public issuers is to properly identify how
the relevant decision factors apply to their proposed bond
issues.
Recommendations
• Participate in all aspects of the bond issuance
• Assess the level of demand for the issue
• Focus on the total costs of the financing
• When in doubt, hire a financial advisor
• Evaluate the method of sale for every issue
QUESTIONS?
Resources
A Comprehensive Evaluation of the Comparative
Cost of Negotiated and Competitive Methods of
Municipal Bond Issuance, Municipal Finance
Journal, Vol. 28, No. 4, Winter 2008
Advantages and Circumstances Favoring
Competitive and Negotiated Sales of Securities,
http://www.speerfinancial.com/advantages.php
Resources
Competitive Versus Negotiated Sale of Debt, Issue
Brief No. 1, California Debt and Investment
Advisory Commission, September 1992
Best Practices Related to Debt Issuances,
Government Finance Officers Association, 1994
The Municipal Underwriting Process, PiperJaffray,
http://www.piperjaffray.com/pdf/021614_municipalbondunderwriting.pdf
Resources
Bond Sale Methods (Competitive vs. Negotiated
Bond Sales) , WM Financial Strategies,
http://www.munibondadvisor.com/SaleChoice.htm
Competitive and Negotiated Bonds Sales - Making
the Right Choice, WM Financial Strategies,
http://www.munibondadvisor.com/SaleMethodWhitePaper.htm